Flexible Savings within CSA: Framework for Security and Mobility

Thursday, May 28, 2015

Next month, AEDI begins data collection for our research on New Mexico's Prosperity Kids Children's Savings Account program, administered by Prosperity Works. One of the particularly intriguing elements of this CSA, from our perspective, is the inclusion of an emergency savings vehicle for parents. While U.S. policy and financial services have long viewed children as passive recipients of savings, the incorporation of parental savings with a CSA flips that frame, seeing some potential value in engaging parents through the lever of their children's activation as savers.

A new paper by New America elevates the importance of this concept of 'flexible savings', at the very moment that we're considering how this particular approach can cultivate them. Our good friends and colleagues highlight the fact that no U.S. policy supports the development of these short-term or undefined-use savings, unlike policy efforts to foster home equity and retirement savings, for example. Too few Americans have access to quality financial products for their flexible savings, and too many low-income households face real disincentives that limit their savings.

The effects are devastating, as New America points out here.

Americans need flexible savings more than ever; more than 50% have unpredictable income and/or expenses, with few resources to avoid hardship and smooth consumption during difficult financial times. Really few resources: the median amount the lowest-income families hold in checking or savings accounts fell by 1/3 between 2007-2013, to only $600.

Without a financial foundation, these families can't climb the economic ladder. Instead, they're stuck or, worse, falling into financial ruin when the predictably unpredictable hits.

New America outlines a policy agenda that could alter this trajectory, including the elimination of asset limits, stronger consumer protections for account-eligibility screening, leveraging public assistance programs to get people banked, taking advantage of tax-time to deliver incentives and connect people to institutions, and enhancing existing long-term savings vehicles (myRA, employer-provided retirement plans) with flexible features.

Our research in New Mexico may reveal some promise in another path, too: creating a universal Children's Savings Account program so that we cultivate a college-saving mentality among an entire generation, and, then, work through these saving young people to set adults on an asset-accumulation path, as well. This connection could be particularly successful if, as we and others have recommended, CSAs were envisioned as both medium- and long-term vehicles, for children to save not just for college but for educational opportunities along the way, too.

Assets can be both a catapult and a cushion.

Our policy should make it so.

 
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